Securing a Security: Implying limits in a guarantee13 April 2021

Background

The claim concerned the charter of two crude oil tankers to Al-Iraqia Shipping Services and Oil Trading (“Al-Iraqia”) under separate bareboat charters in early March 2019. Arab Maritime Petroleum Transport Company (“Arab Maritime”) guaranteed (as a primary obligor and not merely as surety) the performance of Al-Iraqia’s obligations under the charterparties.

In late 2019, the Owners terminated the charterparties on the basis of alleged breaches by Al-Iraqia. As well as commencing arbitration against Al-Iraqia, they also brought separate arbitral proceedings against Arab Maritime under the subject guarantees (“Guarantees”).

In July 2020, the Owners then successfully applied to the Provincial Court of Luanda, Angola for the arrest of an unconnected vessel owned by Arab Maritime as security for their claims under the Guarantees. However, following an expedited application based on limited facts, Arab Maritime obtained a declaration from the tribunal that the Guarantees were subject to an implied term that the Owners would not seek additional security in respect of the matters covered by the Guarantees. The Owners appealed that decision to the English court under section 69 of the Arbitration Act 1996.

The decision

Implying terms into guarantees?

The legal test for implication of terms is, as the Commercial Court noted, a high one. A term will not be implied merely because it seems fair or because the parties would have agreed to the term if it had been suggested to them. Instead, a term will only be implied if it is necessary in order for the contract to work. However, in this case it was not clear that the arbitrator had addressed the correct legal question, and on the application of the test, the Commercial Court did not consider that the circumstances warranted the implication of an additional security term in the Guarantees:

• The Guarantees were on “boilerplate terms”. Implying the additional security term proposed into these Guarantees would suggest that the term should be implied into other generically worded guarantees;
• Arab Maritime contended that without an implied term limiting the Owners’ rights to further security, the Owners would be entitled to “double security” in response to any breach by Al-Iraqia (i.e., the Guarantees issued by Arab Maritime and Arab Maritime’s arrested vessel). However, the Court disagreed, noting that the Guarantees created a separate contractual relationship to that between the Owners and Al-Iraqia. The Guarantees could be called on according to their terms if there was an arguable breach by Al-Iraqia, while the right to seek security against Arab Maritime became available only if Arab Maritime did not respond under the Guarantees;
• The Court also rejected Arab Maritime’s attempt to draw an analogy to arresting a P&I Club’s assets, commenting that “there is no reason of principle why such security would not be available”, but that practicalities rather than legal principles may deter such course of action. Indeed, in most circumstances, it would be rare that the financial position of a guarantor is such that it is necessary to seek security;
• The arbitrator had held that the Guarantees must have been considered to provide “adequate security” because otherwise the charterparties would not have been entered into. The Court also made short shrift of this argument, noting that while the contract with Al-Iraqia had been concluded because the Guarantees were sufficient security in respect of Al-Iraqia’s obligations, this did not mean that an adequate security was contemplated vis-à-vis Arab Maritime, who had an independent and separate obligation as the guarantor; and
• The Court recognised that in normal circumstances, a party will often be able to obtain security in the event of an arguable default. The implied additional security term in this case was therefore akin to an exclusion clause, taking away such a right. However, a court will generally require clear words before it will conclude that a contract has taken away the common law rights or remedies of a party and there was no clear indication of such an intention in the wording of the Guarantees.

Although the normal position following a successful appeal under section 69 is for remission of the award back to the tribunal, in this case the Commercial Court declined to do so, noting that the parties had agreed an expedited reference which did not allow factual matters being dealt with as part of the determination. This was not a case where there was an error of law to be applied to determined facts and the arbitrator could not “sensibly re-run the determination” in light of the clarification on the point of law. The Commercial Court’s decision that there was no implied term was therefore substituted for the tribunal’s award.